UK smaller companies sector outperformed in 2013
2013 proved an auspicious one for investment company shareholders, with the average company up 15% in share price total return terms.
Interestingly, 2013 was particularly successful for the more developed markets. The top performing investment company sector in 2013 was UK smaller companies, up 49%.
Yet whilst this sector has often been overlooked in the past (the average discount for UK smaller companies is nearly double that of the average investment company), it has been regularly outperforming for years and over 10 years has outperformed the average investment company by 63%.
The UK all companies investment company sector did well too, up 32%, although European smaller companies were the second top performing sector, up 48%, bouncing back strongly after a difficult year in 2011, followed by Japan, up 46%.
Commenting on the remarkable turnaround in Japan’s fortunes Sarah Whitley, manager of Baillie Gifford Japan Trust, said: “During the past year the yen has weakened significantly, allowing Japanese manufacturing to be repriced into world markets, company sentiment has improved tremendously and there are encouraging signs that growth is spreading into the broad domestic economy.”
Other areas that have performed particularly well have been the sector specialist: the biotechnology and healthcare sector in particular, following a sustained period of outperformance of the wider investment company sector over one, three, five and 10 years.
Of course, some sectors such as Asia Pacific, emerging markets and commodities and natural resources had a more challenging time, although their strong longer term performance serves as a useful reminder of the all-importance of that long-term view.
So 2013, in short, has presented some surprises both on the upside and the downside, but anyone with a balanced portfolio should be feeling happy with their investments. And data suggests that appetite for investment companies is on the up, too.
The average investment company discount, which represents the difference between the value of the underlying assets and the share price, closed 2013 at its lowest since records began in 1970, at 3.4%. Of course it’s worth remembering that discounts vary widely from sector to sector and across individual companies, and a third of the sector still currently trades on a double digit discount.
It’s likely that in 2014, for many investment company shareholders, income will continue to be an important theme. No-one can predict when interest rates will rise, but appetite for both the core income sectors with strong dividend track records looks likely to continue.
These sectors such as UK equity & bond income and global equity income are increasingly issuing new shares to meet demand. In fact, many of these funds are now trading on premiums (the share price is worth more than the value of the underlying assets) or close to the value of the underlying assets.
In addition, demand for the more specialist, higher yielding investment companies with difficult to replicate strategies, looks likely to continue. New issues from income focused investment companies has been a distinguishing feature of the sector in recent years, from sector specialist infrastructure through to debt.
Overall, there’s no knowing whether 2014 will prove as auspicious as 2013 but the investment company sector is well prepared to meet the challenges. Investors with balanced portfolios and a long-term view are best placed to weather whatever ups or downs that lie in store. Let’s hope it’s another good one.